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Mind the gap

Commentary: Time to tackle Wall Street's diversity problem

By

SuzanneMiller

NEW YORK (MarketWatch) -- As Wall Street chieftains parade before the Financial Crisis Inquiry Commission, it's hard to resist a tug of cynicism.

Let's face it, we've seen this all before. Every few years, Wall Street rides the bull, tumbles off and gets back up again. Only this time, Wall Street almost didn't rise again. Contrite chief executives have vowed this will never happen again, pointing to tighter regulations and newer risk models. This sounds suspiciously like consensus thinking. It's time for a deeper view.

The reality is that Wall Street boards and executive committees still score incredibly low when it comes to any kind of real diversity -- the inclusion of different perspectives from professionals of both genders and different backgrounds that have requisite core competencies.

It's in Wall Street's interest to reflect as many informed perspectives as possible, and to understand the complex strands of the economy from the ground up, those that exist outside value-at-risk (VAR) models. Would executives have been quite so blind to the mortgage crisis if associates had been out talking to people flipping properties and nailing easy loans, rather than conferring with other blue-chip MBAs?

The willingness to think more flexibly and include diverse perspectives at the decision-making table can provide an important check to status quo thinking, one of the factors that drove financial firms over the cliff. Among the many changes needed today, this could be one of the more important: fresh thinking and a willingness to change club rules.

"There's a portion of the corporate population that brings others onto the board like themselves because they think the same. They are risk-averse to change, and that's where the risk goes unrecognized," says Abby Adlerman, a 15-year investment banking veteran and managing director of Russell Reynolds Associates, the senior executive recruiting firm.

She and colleague Amy Hayes, Ph.D., a managing director in the firm's Executive Assessment practice, are co-authors of a white paper, "Different is Better: Why diversity matters in the board room."

Wall Street firms would argue that they do a commendable job promoting diversity. Indeed, many do have programs to nurture women and other groups, such as Goldman's well-respected 10,000 Women initiative, aimed at helping underserved women in business around the world.

That said, a mere 16% of executive and board positions in the financial services are held by women, according to a 2009 report by the National Council for Research on Women. That tracks similar findings by Catalyst, the nonprofit research group that's focused on women in business. It reported that women held just 15.2% of all board director positions among Fortune 500 companies in 2009 -- little changed over the prior five years.

The continental divide

Wall Street's gender problem isn't just a gap, it's a continental divide. Jacquelyn Zehner, who in 1996 became the youngest and first woman to be made a partner at Goldman Sachs, was deeply involved in the firm's diversity efforts. No longer with the firm, she's a founding partner of the private wealth management firm, Circle Financial Group, among other ventures, and a skeptic.

"Goldman has had 25 years of diversity efforts and although they remain "best in class" as far as financial services, the percentages are quite low there and even more so elsewhere. It begs the question, why is that?"

The diversity issue is certainly on more minds as the markets conduct a postmortem of the financial crisis. Some are throwing money at the issue, based on studies that show Fortune 500 companies perform better over time when they have more women in board and executive positions.

Catalyst published a 2007 Bottom Line report, which found that Fortune 500 companies with the highest percentages of women on board directors, on average, outperformed those with the least based on three metrics: return on equity (+53%); return on sales (+42%); and return on invested capital (+66%).

Other studies have produced similar findings, including ones by McKinsey, management consultants, and California's Pepperdine University.

Citing these performance figures, Zurich-based Naissance Capital has been raising money for its Women's Opportunity Fund, endorsed by political luminaries such as former Cherie Blair, U.K. Prime Minister Tony Blair's wife, and Jenny Shipley. The fund, which has delayed its scheduled January close, initially aims to invest in U.S. and European companies that have a high number of women in senior roles.

In France, President Nicolas Sarkozy's Union pour un Mouvement Populaire party is floating legislation that would force all companies listed on the French stock exchange to balance 50% of their boards with women by 2015. That's similar to what Norway pulled off in 2002, when the government ordered state-owned companies to fill 40% of corporate board seats with women by 2008 or face closure. In 2002, women held just 6% of board seats in the country.

In the U.S., where markets are arguably different, such quotas are typically shunned. Still, it's interesting to note that the World Economic Forum's Global Gender Gap Report for 2009 found that Nordic countries continue to have the smallest equality gaps between men and women in the world and are among the most economically prosperous. In the same survey, the U.S. clocked in at No. 31 among its global peers -- just below Lithuania and Cuba.

The SEC is watching

In the U.S., some are looking to the Securities and Exchange Commission for help. In December, the SEC published changes to proxy disclosures to improve risk accountability and corporate governance, which take effect this February. Among new rules, companies will be required to disclose how they consider diversity when reviewing candidates for directors. The SEC cited the work of Catalyst in its findings. "Many of us wrote letters," says Ilene Lang, CEO of Catalyst, referring to major institutional investors like the California Public Employees' Retirement System (CaLPERs), "that talked about the business case for diversity on boards, a business case based on shareholder value."

Nell Minow, editor and co-founder of Corporate Library and veteran gadfly on corporate governance and accountability issues, says what's really needed is to stop having CEOs choose their boards, period.

Let shareholders decide, and make it easier and more affordable to launch proxy challenges. "I don't care if board members are the blue guys from the movie Avatar. I just want them to do a good job," she said. And while she believes there's no evidence to suggest women could have done a better job steering clear of the crisis, she supports diversity though spurns the thought of picking board members based on their chromosomes.

She's certainly not alone. Russell Reynold's Alderman says: "We believe that diversity of perspective is better for the board as well as the individuals; no one wants to be part of diversity just for diversity's sake.

Catalyst's Lang also believes inclusiveness is good for everyone in the long run. She says that when boards move beyond the tokenism of one woman and start including three or more, studies show these companies typically gain a performance advantage. "When boards include fresh voices that are willing to challenge group thinking, it's good for everyone in the long run. More diversity offers opportunities for women -- and men," she said.

Ultimately, there's no one panacea for preventing future financial crises. But it does seem clear that there's a big pool of untapped, talented people waiting in the wings to help. Maybe it's time for Wall Street to turn off the PowerPoint and take a look outside.

Suzanne Miller is a freelance business writer in New York, specializing in banking, economics, corporate finance and global markets. She is a former London bureau chief for MarketWatch.

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